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Virgin Galactic is still a 'pre-revenue' company as space tourism picks up

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Canaccord Genuity VP and Senior Aerospace & Defense Analyst Austin Moeller joins Yahoo Finance to discuss Virgin Galactic's Q3 earnings and what's next for the company.

Video Transcript

KARINA MITCHELL: Welcome back. Well, Virgin Galactic reported third quarter earnings, posting losses that were narrower than expected, boosted by ad revenue ahead of its race to be first to the edge of space, beating out rival Blue Origin. You can see the stock is up there almost 6%. But does it still face some challenges?

Here to discuss all of that is Austin Moeller, Canaccord Genuity VP, senior aerospace and defense analyst. Sir, thank you so much for your time. Just a little bit further digging into that earnings result, Q3 sales came in at $2.6 million, net loss of $48 million. Top line result was 41% better than estimates, as I said, helped along by ad revenue ahead of that Unity flight. Just, if you would, break down your characterization of the results for us.

AUSTIN MOELLER: Sure, on the top line, the results were better than anticipated. That largely reflected increased sponsorship revenue associated with Richard Branson's historic spaceflight, in addition to government milestone payments associated with payload integration on the spacecraft during the recent spaceflight in the quarter. So that's not expected to be recurring.

And I think it's important to note that essentially, the company is pre-revenue. And so, we don't expect a material ramp in revenues until the third quarter and fourth quarter of next year, as they begin to ramp up space flights again after the current spacecraft enhancement period that they're currently undergoing on the two existing spaceships.

JARED BLIKRE: Well, let me just follow up on that here. A little bit of a disappointment a month ago when they announced that they would be postponing their commercial flight operations until, I believe, the fourth quarter of 2022, but signaling that they're going to be flying three times monthly in 2023. Is this what investors want to see right now?

AUSTIN MOELLER: I would certainly argue yes. I mean, the most important thing that Virgin Galactic needs to do right now is scale the business. And the maintenance and enhancement period that they're currently undergoing on the VSS Unity spaceship and the VMS Eve mothership is intended to achieve that objective. The intended flight rate is expected to be once every four to five weeks for the VSS Unity after the upgrade period, as opposed to seven to eight weeks currently in turnaround time.

And they plan to have the VMS Eve mothership, which carries the vehicle to altitude for launch at around 45,000 feet. They plan to have the amount of flights that can be conducted in between maintenance periods to be around 100 flights after this enhancement period is completed.

And then, of course, the future spaceships, the VSS Inspire, which is a spaceship 3 class vehicle, and the upcoming delta class vehicle are expected to have much better turnaround times between flights. The target flight rate for the future delta class spaceship is once per week, which will be critical in being able to scale the business and work through the outstanding backlog.

KARINA MITCHELL: And then how close are they, sir, to having future astronauts in the pipeline before the actual flights start? And then how much are they charging? The prices have gone up significantly, correct?

AUSTIN MOELLER: Yes, that's correct. The original ticket price for a flight on Virgin Galactic, which essentially goes suborbital and takes you to the edge of space, was $250,000. The new ticket price announced in July when they reopened ticket sales is now $450,000. However, during the earnings rolls, they did indicate that they've added 100 new passenger deposits since they reopened ticket sales in July.

And what's so interesting about that is that these passengers were derived from their One Small Step initiative, where they had 1,000 people put down a $1,000 deposit indicating their interest in a future space flight. And they got 10% of those people to convert into a $150,000 deposit, of which $25,000 is non-refundable.

So, it's certainly apparent that the TAM opportunity here is significant. If you look at the worldwide number of high net worth individuals, it's somewhere around 19.5 million. And in our estimates, we estimate that only 5% of the cohort between-- with a net worth between 1 and 5 million are interested in spaceflight. And we think that that may actually be a conservative estimate.

JARED BLIKRE: I got to love it when we start talking about the TAM of space, seemingly almost an infinite. But I want to ask you a question about your industry in general. We were talking to a value investor earlier, just noting that a lot of the defensive stocks have gotten knocked down over the last month. Boeing down 3%, Northrop Grumman down 7%, Lockheed down 4%. I don't know if you can talk to any of these stocks in particular, but even just as to the industry, do you see this as a good place to invest right now?

AUSTIN MOELLER: I would certainly argue yes. If we talk about the broader defense sector, there was obviously a lot of pressure put on those stocks, both earlier in the year on expectations that the defense budget would be markedly lower, in addition to the pullout from Afghanistan. However, if you look at the current drafts of the defense budget that are currently being debated in Congress, it shows that the budget is going to be single-- up single digits over the prior year and up single digits over the Biden administration's original request.

So we think that the pullback here in the A&D sector more broadly, as well as the new rush of space sector stocks, which have largely been going through SPAC transactions and mergers in the last few months, we think that that's currently overblown at this point.

KARINA MITCHELL: And I wanted to ask you, sir, really quickly, if you could tell me about cash burn. How much of that is an issue going forward for this company? What are they spending the money on? Is it on technology and enhancements? Because there's also space for it to maneuver into hypersonic flights, correct?

AUSTIN MOELLER: Right, there is expectation that they want to develop vehicles for hypersonic point-to-point travel sometime in the near future. However, the primary focus right now on the business is development of the delta class spaceships, which are going to be the production serious spaceships with the high turnaround rate between flights of one week that will replace the VSS Unity and the VMS-- VSS Imagine spacecraft.

In the fourth quarter, management estimates that there will be free cash flow use of around $90 million at the midpoint, which is markedly higher than the most recent quarter. And they expect it to remain elevated through the next year, as they get towards the first future astronaut flights in the fourth quarter of next year, and of course, further development of the delta class. So that's currently where we see things going right now. Although the--

JARED BLIKRE: Yeah, you've got to love-- yeah, go ahead.

AUSTIN MOELLER: I was just going to add that the company currently has a billion dollars in cash equivalents and marketable securities outstanding. So management's fairly confident that they'll be able to get through the maintenance and enhancement period in at least the early part of the delta class development with what they currently have.

JARED BLIKRE: Yeah, a good time to load up on cash is right now, while interest rates are cheap. Thank you for those insights, Austin Moeller, Canaccord Genuity VP, senior aerospace and defense analyst.